How U.S. Elections Impact Long-Term Interest Rates
Roberto Campos Neto, the President of the Central Bank of Brazil, recently addressed concerns regarding the impact of the upcoming U.S. elections on long-term interest rates at a recent Itau event. Campos Neto noted that market expectations indicate potential inflationary effects stemming from the electoral race between Republican Donald Trump and Democrat Kamala Harris.
He emphasized that both U.S. political campaigns include elements of fiscal expansion that could contribute to inflation. Furthermore, he pointed out that proposed changes in trade and immigration policies are viewed as potential factors that could increase inflationary pressures. These market sentiments are affecting long-term interest rate futures as investors anticipate the possible economic outcomes of the election.
In the context of Brazilian economic indicators, Campos Neto stated that recent consumer price data showed a marginal increase in inflation, reaching 4.47% in the 12-month period ending in mid-October. Although this figure surpasses the official target of 3%, it remains within an acceptable tolerance margin. He welcomed the Brazilian government's announcement today regarding a reduction in energy tariffs in November, noting that this prompted economists to revise their inflation forecasts.
The central bank president also reiterated the necessity of pursuing positive fiscal reforms to reduce the recently observed increase in risk premiums in Brazil. He indicated that the risk premiums in the yield curve are largely associated with fiscal concerns, yet stressed that Brazil's public accounts are not in worse condition than many other countries. He argued that current long-term interest rates reflect prices that do not align with economic fundamentals.
Campos Neto confirmed the central bank's commitment to an inflation-targeting regime and provided insights regarding the bank's upcoming policy meeting scheduled for November 5-6. Among economists, there is an expectation of a significant 50 basis point interest rate hike at this meeting, following a more modest increase of 25 basis points that raised the interest rate to 10.75% in September.
The central bank's policy decisions and the assessment of ongoing economic developments both domestically and internationally continue to be closely monitored by market participants.